Mozambique’s future LNG windfall will not ease immediate pressures, says S&P

Mozambique should benefit significantly from large liquefied natural gas (LNG) projects from 2030, but the industry’s development will not offset short and medium-term fiscal pressures, according to a report from S&P.

“Mozambique could become a major global producer of liquefied natural gas (LNG). However, delays to projects mean production could only ramp-up materially in late 2028 or early 2029. Windfall government revenues are only likely to materialise by 2030, creating fiscal policy challenges for the sovereign in the interim…We do not believe that gas revenues will offset the government’s liquidity pressures over the short to medium term (before 2029),” the authors write.

ENI, TotalEnergies and Exxon Mobil’s LNG projects in Mozambique could make the country one of the world’s leading LNG producers, according to the report.

“The longer-term fiscal and economic prospects are positive. The government estimates LNG exports could reach $90bn over the life of the projects and the government could receive $1bn per year in revenue from about 2035 onwards,” noted the S&P report. 

Immediate challenges

In the meantime, Mozambique faces immediate fiscal challenges.

The report highlights that the “risks of delayed payments on sovereign obligations will therefore remain high until production ramps up substantially.”

The country struggles with high refinancing risks on both local currency (LC) and foreign currency (FC) commercial debt, significant budget deficits, and delayed payments on sovereign obligations.

“Public management remains weak,” stresses the report. “This has resulted in multiple defaults and restructurings on commercial debt, including in 2016 and 2017-2019 on FC debt, delayed payments on LC debt in 2023 (which we considered selective defaults), and late payment of some bilateral and multilateral creditors in the past 18 months.”

“Government spending continues to outstrip revenue resulting in significantly wider budget deficits and the re-accumulation of arrears to contractors and suppliers,” S&P says.

Budget deficits and arrears to contractors and suppliers are estimated at 3% of GDP in 2023.

Furthermore, the government is still attempting to sort out the “hidden debt” scandal of 2016/2017. It has agreed to an out-of-court settlement for $522m relating to the state-owned ProIndicus’ debt to Credit Suisse.

Persistent liquidity pressures

Mozambique also grapples with some of the weakest external metrics among sovereigns rated by S&P.

“High external indebtedness, strained useable reserves (which cover just 2.2 months of foreign currency payments), high external financing needs, and strong appreciation of the real effective exchange rate compared with the nominal exchange rate, pose risks of a sharp correction,” S&P reported.

“The risk of additional payment delays, or of a distressed exchange or restructuring, remains high due to persistent liquidity pressures.”

“Fiscal reform to reduce fiscal vulnerabilities is ongoing, guided by an IMF program, however, liquidity challenges have risen sharply over the past year,” added the report.

Sovereign wealth fund

In the longer term, however, a new sovereign wealth fund could help to harness the benefits of the LNG industry. To manage the anticipated gas revenues effectively, Mozambique passed a sovereign wealth fund bill in December 2023.

During the first 15 years 60% of gas revenues will be allocated to the budget while 40% will be put toward the sovereign wealth fund for savings. Thereafter, the split will be 50:50. 

“This fiscal rule is encouraging for long-term gas revenue management.” S&P says.